While this week's budget deal may pressage the repeal of subsidies that support some new markets, such as in renewable energy, there are many other, inexpensive ways for public policy to support market creation. The interventions deal more with laying the plumbing of new markets than financing products' initial take-up. This is an apolitical role for government that would benefit from more attention. Read more in my post at Forbes.
Stephen Wunker is the Managing Director of New Markets Advisors and the Author of Capturing New Markets: How Smart Companies Create Opportunities Others Don't.
U.S. federal funding for basic science research has scarcely grown in two decades. Private sector funding has also been flat. While the U.S. is the world's leading company in R&D investments, Research is broadly neglected in favor of Development. Over time, new markets are sure to bear the price. Read about potential solutions in Stephen Wunker's piece at The New Republic
This week marked the annual meeting of America's Health Insurance Plans, an event that drew an unloved group of executives to commisserate about poor margins, upheaval following health reform, and even a group of protesters waving placards calling for the industry's abolition. As trade shows go, it was a real downer. Yet the story of a handful of winners bears strategy lessons for companies in any industry grappling with fundamental change.
Strategy for health insurers in this environment requires a keen sense of how the industry will evolve. Assuming that the courts do not strike down the Affordable Care Act (ACA) underlying U.S. health reform, by 2014 insurers will have to offer a minimum level of benefits, at very transparent prices, in an electronic exchange that facilitates comparisons. In other words, their core products will be commoditized. While reform will drive many of the uninsured to be new customers, they will create scant profits for the industry.
Amid this mess, there are three categories of winners. One group consists of large insurers such as UnitedHealth and Aetna have been getting into adjacent businesses like healthcare IT, disease management, and clinical decision support. The businesses derive advantages from the data, physician network, and immense customer bases that these companies have, while helping them differentiate the quality of their insurance offerings through promising better health outcomes. Already, these businesses are producing substantial profits for the early leaders.
Another set of winners are IT companies facilitating data mining and integration of care provision. Health insurers, hospitals and physician practices were historically discrete silos that scarcely communicated with each other, but the management of complex, chronically ill patients benefits hugely from coordinated care. If insurers are to have a hope of profits with the transparent pricing under the ACA, they will need to tightly manage these costly customers. The trade show's exhibit floor was a scrum of IT booths jostling for share in this rapidly expanding market.
A final group seizing the upside are hospitals that are leading integration with physician practices to form "Accountable Care Organizations" that will bear the financial risk, and benefit, of effectively managing disease. Some insurers have tried to lead the creation of ACOs, but except in certain circumstances (e.g. some rural areas, states dominated by a single Blue Cross plan, plans that own hospitals) they lack a large share of the total number of patients served by a given group of doctors, so they are supporting the costly creation of a care management organization only to reap a small portion of the financial reward. They will learn about ACOs' dynamics from their efforts, but it is hard to see them scaling up these programs.
If they are not in one of these groups, many health insurance companies seem lost at sea. They are tweaking their model, but the model is broken. Differentiation will come from providing higher quality care, which in healthcare usually results in lower costs (due to avoided hospitalizations and the like). Insurers claim that hospitals cannot do what insurance companies can -- they will not take out insurance licenses, mine data, or sell to employers. But that misses the point. Those activities are commodities; they offer little way to differentiate. If companies are not seriously invested in IT or very tightly integrated with a set of hospitals or physician practices, they are relatively inter-changeable.
For readers outside the healthcare industry, forgive the long discourse above. U.S. healthcare is complicated. Let's look at the implications for any firm:
- To innovate, a company will benefit from integration across steps in the value chain. Insurance plans that own hospitals and physician practices have been noted innovators in their industry. In a rapidly changing industry with many steps in the value chain, intense competition among fragmented players may not lead to innovation, as those players will lack the scale to integrate across value chain steps to force change. Both Republicans and Democrats have claimed that competition in the insurance industry can lead to innovation, but they get it wrong -- until consolidation occurs, competition will lead only to rock-bottom pricing on uninteresting offerings.
- Focus on the toughest problems of an industry, because that is where serious money can be made from producing better solutions. Healthcare IT has long been horrendously complex, but it is a huge need.
- Be close to the customer. Hospitals and physician practices are in the cat-bird seat because they have the power to change the quality and cost of care. Health insurers interact with patients at arms length, and they lack the personal contact that is often essential to changing lifestyles and ensuring compliance with treatment regimens.
- Have scale in a niche. Marshfield Clinic is a modest-sized health insurer and physician practice group, but it is a giant in rural Wisconsin. It has had the scale in those small communities to invest in the health of the overall population and knit together tiny physician offices through world-class IT systems. By contrast, many health plans in California are far larger than Marshfield, but the market is keenly competitive and they have lacked the power to create change among many physician practices and hospitals.
Health insurance is a complex, competitive, and highly regulated industry. It's tough to win. But those who have managed to triumph in this environment provide a roadmap for capturing the upside of new markets.
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This past week in Congress, a rare bipartisan coalition introduced a bill known informally as the Pickens Plan, after the Texas natural gas magnate T. Boone Pickens who has talked it up incessantly for the past two years. The Pickens Plan would spend $1 billion a year for five years to subsidize the manufacture of heavy trucks that would burn natural gas, as well as provide tax incentives to truck stop owners who install natural gas refueling equipment.
The thesis of the Pickens Plan is that natural gas is cheaper than oil (true), that it can come largely from supplies in the US and Canada (true), and that it produces less greenhouse gas emissions than diesel fuel (sort of true). The 8 million heavy trucks in America constitute only about 3% of country's vehicles, but a whopping 23% of transportation fuel use (or 16% of total oil use). Pickens claims that moving this fleet to natural gas would halve U.S. imports from OPEC (sort of true). Of course, moving the fleet to cost-effective biofuels would accomplish this objective too, but don't hold your breath. Electric vehicles may impact fuel use as well, although for technical reasons they are unlikely to take root in the heavy trucking fleet.
Let's leave aside the issue of whether this is a good way to spend at least $5 billion, and focus solely on whether the Pickens Plan for natural gas vehicles creates a viable new market. New markets get their start in footholds that may be a sliver of total consumption but which 1) avidly adopt the new solution and 2) provide a stepping stone to broader market penetration. Think of the effect of World War I on aviation, or the role of sports programming with early adoption of HDTV. Are heavy duty trucks a good foothold?
Undeniably, they are a small, high-impact segment of the market to target -- which cannot be said of some other energy subsidy programs such as for wind and solar. 18-wheelers often travel predictable routes along Interstate highways, so the lack of natural gas filling stations can be addressed through converting a relative handful of truck stops. Earlier steps toward natural gas vehicles targeted city buses and trash haulers, which can be refilled a central depots. This was also an effective, concentrated market to tackle. By giving manufacturers an incentive to produce natural gas vehicles, the Pickens Plan will make them cheaper, so the bill would target two major barriers to adoption.
What else could impede adoption? Dealers may not be incented to sell the trucks (this is an issue for electric vehicles, known as EVs). Skilled mechanics for unfamiliar engines may be tough to find. Resale values may be uncertain. New markets require a view of the total system, and the legislation only targets a couple links in the chain.
The bigger question is whether natural gas vehicles would spread beyond this foothold to light trucks and passenger vehicles. A federal approach may be the wrong way to target the market. The key for broader uptake is not the number of vehicles, but the number in a given area. Filling stations and vehicle repair is an inherently local business. There is a greater penetration of early passenger natural gas vehicles (e.g. the Honda GX) in Southern California in part due to fleet filling stations being open to the public. However the vastness of Southern California does not really correspond to the sort of tightly-packed, motivated market that typically demonstrates the value of new technologies. A city like Portland, Oregon would be a better fit for a proving ground.
Of course, Portland would prefer to go electric, which gets to the other issue facing broader penetration of natural gas vehicles. With battery technology rapidly improving, consumers may opt to go for EVs or wait for a better EV. New markets do not take off when consumers have strong incentives to wait. So there is little to suggest that natural gas vehicles would penetrate the market quickly, and much in the works in laboratories to make them an uninteresting long-term choice.
The upshot: the Pickens Plan could impact oil imports in the medium-term, to the extent that these are affected by fuel use in heavy trucks. But that's it. A rare bipartisan push for legislation, and it has to be about this?
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Today's Wall Street Journal contains a special report on innovation in healthcare, under the banner headline "The Time to Innovate is Now." What follows is an uncontroversial call for more innovation in response to escalating healthcare costs, along with a description of several disconnected but novel programs. What's missing is an assessment of why new markets take so long to get moving in healthcare: the system is not aligning incentives for innovation.
The underlying problem is one afflicting many industries slow to take up promising innovations; healthcare in the United States is incredibly fragmented. Not only are there health insurers, hospitals, medical practices, independent physicians, vendors, and countless others, but there are many competing entities in almost all these categories. On the plus side, fragmented systems can provide new ideas with tiny footholds willing to try new things. The downside is that they can hinder the rapid spread of learnings. Not only are there poor mechanisms to spread effective ideas (the "agricultural extension" model has been embraced only tentatively in healthcare), but financial incentives for healthcare change are seldom aligned. Innovations may help insurers but place new burdens on physicians, and so forth. All this misalignment leads some healthcare observers to argue that the cure for healthcare's ills isn't bold new innovation, but rather broad adoption of innovations already trialled by brave pioneers.
This view may be cynical and extreme, but there is truth to it. America's healthcare cost crisis could be largely solved if high-cost states could equal the spending of lower-cost states such as Minnesota (where health outcomes also exceed those of high-cost states, even after making adjustments for prevalence of disease). This sort of opportunity can be common in disconnected systems. For example, greenhouse gas emissions from homes and buildings could be slashed 30%, at no net cost, if the building industry would adopt energy efficient technologies and methods.
So, how can healthcare align incentives? We are not about to revamp the U.S. healthcare economy (again). However some organizations, such as Medicare and Blue Cross of Massachusetts, are experimenting with "global payments" to a single entity such as a hospital to coordinate all care for a patient and align providers' incentives accordingly. This trend, as it gains strength, at last gives the recipients of these payments the financial leverage to force other stakeholders to align behind innovations in care. For innovative companies wishing to grow through reducing healthcare's costs, the answer is to become one of the answers that hard-pressed health systems adopt as these payors hand the systems the power that global payments create.
This strategy requires companies to generate a track record, quickly, with the sort of organizations these health systems will look to for validation of a new solution. Such "reference customers" need to be similar to the types of health systems that will be forcing through change. A reference customer like Massachusetts General Hospital or Kaiser Permanente may be too unusual -- they are highly sophisticated, with advanced IT systems and thousands of physicians. Tiny medical practices are unrepresentative as well; these small groups are unlikely to receive global payments from payors and will find it increasingly difficult to survive. This leaves a reasonably small number of large group practices of around 50-200 physicians as the vanguard of change. These practices will be some of the most important recipients of global payments, and they may be far faster-moving than some of healthcare's behemoth providers.
To build a track record, companies need to generate data, but they also need to iterate their model given the fast changes in this industry. Accordingly, they need to adopt a two-track approach with clinical trials following fixed protocols, accompanied by "commercial trials" with highly flexible approaches. The clinical protocol may well be out-of-date by the time the study concludes, but it will generate useful data nonetheless which a commericially up-to-date organization can flog relentlessly.
This two track strategy, aimed at the middle tier of the market, is applicable in fields well outside of healthcare. For instance, makers of energy efficiency technologies could follow the same approach with mid-sized architecture and building firms. The strategy lacks the sizzle of partnering with the sexiest large firms, and it costs more than a single-track approach. Yet it is the pragmatic way to tackle disconnected systems poised for rapid change. Just as in baseball, aiming for a couple of well-timed base hits can be a far more effective and reasonable goal than to swing for the fences.
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It is depressing to Google "health insurance innovation." Most links involve rants against a powerful industry, while some make equally spurious claims that public payers such as Medicare have played a scant role in healthcare innovation. There is far too little published about how a huge industry has actually innovated, and still less about what it can do now in response to the major innovation challenges posed by U.S. health reform. This industry's tough situation, and its potential responses, offer lessons for innovators in many other fields.
Due to a variety of provisions in health reform (more formally, the U.S. Patient Protection and Accountable Care Act), the old business model of health insurance is seriously threatened. Plans will become more consistent in their minimum levels of benefits, reduce the ways in which they diverge in pricing, and list their features on an online Health Insurance Exchange. Many will need to reduce their marketing and administrative expenditures. In short, the old ways of doing business will become seriously commoditized. The health insurance industry was not particularly attractive to begin with (operating margins under 5% are the norm), so there is a big need to re-think the business model.
A first step is to look for clues from past health insurance innovations. Health Maintenance Organizations (HMOs), while derided for limiting care, succeeded in reducing the growth of healthcare costs, and using technology to monitor quality in new ways could surmount some of the challenges HMOs encountered in previous decades. Consumer-Directed Plans, such as Health Reimbursement Accounts, led at least "healthy and wealthy" consumers to make better care choices. Integrated Delivery Networks (and their first cousin, Accountable Care Organizations) such as Kaiser Permanente or the Veterans Administration have provided outstanding care for relatively little cost due to coordinating care among physicians, putting doctors on salary rather than fee-for-service contracts, and investing heavily in disease prevention. Overseas, South Africa's Discovery Vitality has been a world leader in using financial incentives to lead members into healthier behaviors. Bangladesh's Grameen Health uses an innovative care delivery model to bring the right people in for care in a low-cost setting. Nigeria's Hygeia HMO contracts directly with large employers to link them with its member hospitals and medical practices, even going so far as to placing clinics on-site at many workplaces to help monitor and treat chronic as well as acute conditions.
Next, health insurers should consider asymmetric competitors. An emerging trend is for large employers to cut out insurers through self-insuring their risks, using Third Party Administrators to process claims, contracting directly with medical providers such as local hospitals, and placing clinics on-site. Another approach has been taken by Washington State's Qliance, a group of medical practices that offers individuals the equivalent of health insurance without the insurance firm -- it charges a monthly membership fee for use of its clinics. A third tack has been deployed by some of the big national carriers like Aetna, rolling out sophisticated decision-support software for physicians that may give it a means of steering members into higher-quality, lower-cost treatment protocols (oftentimes in healthcare, a minimally-invasive approach that treats conditions properly the first time around is both better medicine and better business).
Then insurers can consider their options, which depend on their starting point. Big national carriers can invest in IT-centric tools that use their scale and massive databases of treatment outcomes to maximum advantage. They can offer both employers and individuals potentially better care at lower cost. Local players with modest scale but large market share in particular states (e.g. many of the Blue Cross plans) can force providers into relationships where they are compensated a fixed amount per patient and provided quality-based incentives -- this is a more decentralized approach to care than the national players might take, but likewise has potential to both improve medicine and lower cost. Third parties such as Pharmacy Benefit Managers might turbocharge their efforts to contract directly with employers, helping to coordinate care on their behalf partly through remote monitoring technologies, call centers, and new proprietary technologies (witness Medco's high-profile investment into genome-based diagnostics).
This leaves the players who lack either national or local scale. There are plenty of these firms, many of which are non-profit, and they are in a tough spot. These companies need to pick their shots and focus. For instance they could concentrate on certain professions, such as long-haul truck drivers, with tailored solutions. The problem is that health reform limits their ability to price differentially for taking on people with more health risks, although several yet-to-be-issued regulations may give them some ability to do so. Alternatively they may cater to individuals through re-framing their offerings beyond traditional healthcare, such as through offering more types of services through local gyms or combining health insurance with savings and investment accounts. Either way, they need to change the game they are currently playing.
With healthcare costs continuing to rocket upwards, and US healthcare quality often lagging other industrialized countries, there is ample headroom for health insurers to innovate. The key is to make a handful of strategic choices about where a firm's competitive advantage lies, and then to maximimize the use of financial, technological, and business model tools to stake out ground before a host of wounded rivals follow. In a business that revolves on technology, scale, and trust, first-mover advantage can be very real. It is high time for action.
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It has become perversely fashionable to beat up on America's capability to compete vs. China. The U.S. government is often seen as too short-sighted and timid to bolster American capabilities in key sectors critical for the 21st century. By contrast, China seems to be the entrepreneurial visionary. Yet in at least in two very high-profile fields, the conventional wisdom seems dead wrong.
Energy firms such as GE have lavishly praised China for investing big money in making the country the global leader in renewable technologies such as solar photovoltaic (PV) cells. While there are definitely worthy aspects of China's energy policy -- such as its clarity in how things are regulated and what government's position will be over the long-term -- much of the government's funding has gone to sudsidize as much as half the cost of installing renewables. Unsurprisingly, this spending has quickly made China the world's biggest renewables market. The large local market, strong local talent, and generous financing has led to China also becoming the global leader in new markets such as solar PV manufacturing.
There is little doubt that PV will become a large industry, so China's position in PV may create many manufacturing jobs (at high initial cost). But what about innovation and long-term profits? Without these wins, market creation can create growth in the near-term but forsake important future platforms. In another era, emerging markets such as China gained millions of jobs in garment manufacturing, but firms such as DuPont continued to dominate the high-value areas of textile science. While China focuses on manufacturing PV, Silicon Valley is shifting to advanced technologies that can be licensed to the Chinese. For instance, after installing a 10 megawatt production line in 2008 a start-up called Innovalight decided it was more sensible to license their critical technology so that it could appear in many manufacturers' PV cells. This is both good business sense and a way to retain the highest value jobs in the United States. To an analogy from Professor Clayton Christensen and the hockey great Wayne Gretzky, China is investing billions to stake where the puck is, while Silicon Valley has the flexibility to skate to where the puck will be.
The United States has a checkered history of supporting innovation, but in bolstering the spread of healthcare IT the government is clearly calling the right plays. Rather than investing vast sums in an enormous national healthcare IT system (as the UK did, only to scrapped the failed project), it has taken a far leaner, more flexible, and generally more cost-effective approach. The government is subsidizing the cost of healthcare IT installation by physicians, but doing much else besides. It is creating beacon communities to serve as reference customers for wary doctors, showing the value of adopting these systems. It is borrowing from the agricultural extension playbook by creating local extension programs devoted to surmounting everyday implementation issues in doctors' offices. The government is also partnering with industry to create standards for data interchange between software systems. Another initiative has the government copying from the weather bureau, of all places, in placing a huge amount of data online, in machine-readable format, and creating a software developer community through meetings and competitions to leverage this data in a host of ways that only a few dreamers can conceive of today. In short, most of these initiatives are dirt-cheap, leverage government's unique position, and rely on entrepreneurism to generate wave after wave of new markets using these resources.
The great and challenging thing about new markets is that the innovation never stops. By investing too much in creating a new market that seems close, government can overly influence entrepreneurs to lose focus on the great new markets of the slightly more distant future. Government can play a critical role in market creation, but that role should be one that relies on entrepreneurship to discern where the next big opportunities lie.
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With Congressional negotiators reaching agreement early this morning on key provisions of the U.S. financial overhaul, it is a good time to weigh the impact of the bill on innovation in this sector. Many commentators have predicted that the impact of the financial overhaul on innovation might be dire. Others have indicated that reducing innovation might actually be a good thing, given that innovative financial services played a key role in the economic crisis of 2008. Both of these assessments seem to miss the mark.
The 2000-page bill is extremely complex, and a blog post cannot do justice to all the intricacies. At a high level, the bill will curb banks' ability to profit from proprietary trading, creating complex derivatives, pushing consumers into costly products, or charging hefty fees to merchants accepting debit cards. Banks, particularly big banks, will earn far lower profits in these areas, which represent key financial services innovations from the past two decades.
But what about the financial overhaul innovation impact going forward? While it was relatively easy for banks to make money (prior to 2008) by innovating in established product lines, such as through creating seemingly infinite varieties of mortgages, there have been few new product lines emerging from large banks, nor have these institutions paid much attention to the 7.7% of unbanked or 18% of underbanked U.S. households. Instead, some of the more creative approaches have come from non-bank institutions ranging from economic development groups to hedge funds. Witness for instance the alternative to payday lending created by Kentucky's Mountain Association for Community Economic Development, which embeds a savings product into a relatively inexpensive short-term loan.
The bill imposes fewer restrictions on non-bank financial institutions. This is a double-edged sword. On the one hand these groups have many degrees of freedom to innovate. On the other hand they were so innovative in the past in part because they had to play the game differently from the big banks, who had inherent advantages from their low cost of capital. With the big banks now having fewer routes to generate line extensions in their core business, the periphery of financial services might become more competitive.
Big banks will no doubt try to cut costs from their systems, and much of their energy will focus on operational efficiency. They will also gain a short-term bump through growing non-interest revenue such as checking fees. Yet cost-cutting is not the way to satisfy the most creative staff in these institutions, who will also recognize that the exceptional compensation of years past came through growing revenues, not slashing expenses. And there are competitive and regulatory dangers in being too aggressive on fee revenue. To create growth, banks will need to look beyond their cores. This means catering to non-traditional customers, in ways other than the traditional luring of them through free checking accounts and making money on other offerings. It may also mean looking to non-tradtional areas such as risk protection (let us not call this "insurance" for fear of thinking too narrowly), asset finance, and short-term investment.
Altogether, the financial overhaul's shake-up should create new pressures to innovate, for both banks and non-banks. We may no longer have 20 types of mortgages (not such a bad thing), but we will have institutions focusing on the vast non-consumption that continues to bedevil financial services of all types. This is the most promising sort of innovation for both financial institutions and consumers.
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Transparency promotes market creation. If customers can understand the quality and cost of new propositions, they can assess whether the offering is a good fit for them. The greater the number of people who can make this assessment, the more likely it is that some segment of customers will find it attractive. Moreover, if customers have direct exposure to this information they can overcome the inertia often found in gatekeeper-oriented systems, where a relative handful of individuals makes decisions about what to bring to market based on sometimes misaligned criteria.
Teeth whitening works this way. The results of whitening are immediately obvious and the cost is clear. What started out as a procedure performed only in dental offices has migrated into several new markets such as shopping mall boutiques, home whitening kits, and touch up pens. Innovation blossomed.
The American healthcare system is not transparent in its medical outcomes, service quality, or pricing. Its customers, whether these are defined as patients or their employers, often have little idea of whether they are receiving good value. Gatekeepers -- doctors, hospital purchasing departments, health insurers and others -- determine whether new offerings should succeed in the marketplace. This makes sense to some extent. Consumers can't judge whether a new way of performing a surgical procedure is right for them. But because the system reduces the chance for markets to segment, it lowers the probability that innovative offerings will find a viable foothold. Inertia also results from the many layers of decision-makers.
A company called Castlight Health is trying to change that. It has just announced that it raised $60 million from leading investors, including the Cleveland Clinic to become a "Travelocity of Healthcare" for patients and employers. It wants to list online the prices of procedures from a host of competitive providers, gleaning that data from Explanation of Benefits forms.
This is a laudable idea, but it is hard to see it working in the healthcare system we have today. There are currently over 7,000 billing codes, and that number is set to expand by an order of magnitude in the coming years. It is a very complex system to comprehend. Moreover, even for an apples-to-apples comparison of procedures, providers will bill very different rates depending upon what they have negotiated with health insurers. One of a health insurer's main functions is to negotiate these rates, ensure appropriate billing, and monitor quality. It is not clear why this responsibility should be transferred to patients and employers. Costs can vary inordinately between providers for the same procedure, but insurers have strong incentives to negotiate those differentials away or drop the expensive providers from their networks. This is true whether the insurer is carrying the risk or just performing administrative services for a self-insured employer.
A better approach is to have more transparency in quality. Massachusetts, for instance, makes doctor quality data available to patients online, and sites like Healthgrades.com allows patients to make subjective quality assessments on criteria such as trust in the doctor and whether the doctor helps patients make informed decisions. This data can help patients choose where to seek treatment no matter what procedure they need.
Another good approach is for employers and their insurers to have very tightly-managed networks of physicians, possibly including an on-site clinic at large companies. In these systems cost and quality can be more easily controlled, good performance can be rewarded, and innovative offerings can take root by running a shorter gauntlet of decision-makers than is otherwise the case. Patients do not have to worry about cost comparison because their employers and insurers have incentives to keep costs low and the tools to maintain high quality. In a closely-aligned system, costs and outcomes are highly transparent to the key decision-makers. If patients are concerned that the resulting lack of physician choice is leading to poor care, they can make their case to people who have the power and information to do something about it.
While transparency is an important precursor to market creation, it can take different forms depending on industry context. Healthcare may not need a Travelocity. It does need a closer coupling between employer, insurer, physician and patient to foster competition and create a more fertile ground for valuable innovations.
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Starting today, the U.S. Medicare program is to cut payments to doctors by 21%, due in part to Congressional gridlock on how to fund the program at its current spending level. There is ample reason to think these cuts will never come to pass, and that Congress will retroactively extend higher rates for at least several months. But it is useful to think through what the cuts would mean for the healthcare business model, and how they might impact innovation in this vast sector of the American economy.
If payments fell so drastically, many medical practices would stop their intake of Medicare patients, and some might seek to move these patients to other physicians as much as possible. Yet Medicare spent nearly $470 billion last year (20% of national health expenditure), and such vast sums are not easily ignored by physicians. Doctors may also feel a moral obligation to continue treating these elderly patients, who tend to be the sickest. For practices that continue to have a high percentage of Medicare patients, how might they cope?
Many cost-saving healthcare innovations have languished for years due to American healthcare's odd business model. Because physicians typically contract with many health insurers, and these insurers restrict their business to risk aggregation and health plan sales/administration, few parties exist to push through use of new technologies that require novel forms of reimbursement. Insurers do not have the leverage to force physicians into using these technologies, doctors have little bandwidth to undertake a fundamental change in workflows, and patients have scant influence at all.
A prime example is the practice of telemedicine, or "connected health." There is little doubt that many patients could be seen remotely, via webcam or with more advanced instruments, to diagnose diseases, monitor vital signs, and check in on treatment progress. The technology for these consultations is straightforward, and many companies offer well-proven systems. Yet adoption of these platforms can require a substantial change in how practices are organized, a modest time commitment for patient training, investment in IT equipment, suitable reimbursement from insurers, acquiesence from regulators and state medical boards, and a host of other factors. As a result, telemedicine's highest penetration is in settings where there are few good alternatives, such as offshore oil platforms, prisons, and the military.
If physicians had their practice economics turned upside down by Medicare cuts, they would need to consider a radical re-work of how they interact with patients. Large practices could have the clout to approach Medicare and private insurers with a request to at least pilot a substantial shift in care toward telemedicine. While there are increasing funds for such pilots, including from the new healthcare reform law (PPACA), the scale of change needed would require a re-think by payers on how much to invest in this field. Doctors, who can be notorious for resisting changes to long-held practices, would need to embrace telemedicine to survive. Regulators -- heavily influenced by physicians -- would go along. Facing a huge uptick in demand, suppliers of telemedicine systems would need to focus their efforts which would lead to a much-needed rationalization in this sector (for more on this, see the blog post Finding the Money in Connected Health).
We could see a similar effect on the adoption of other cost-saving technologies such as online patient records, ambulatory surgical centers, and non-surgical forms of cancer treatment. Health outcomes would likely improve as a result, given that these technologies need to at least equal the effectiveness of current approaches to have a hope of regulatory approval and commercial adoption.
Without a doubt, Medicare cuts may lead to difficulties, such as long wait times, rushed appointments, and staff layoffs. Yet healthcare needs a catalyst to spur long-needed change and shift the healthcare business model to one where insurers and physicians tightly collaborate to lower costs and provide novel forms of care. Medicare's cuts could have this significant silver lining.
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